THE BOTTOM LINE
Election uncertainties are beginning to abate, even as new uncertainties arise revolving around the ability of a new Administration to effectively govern a deeply divided nation. The weight of the evidence continues to favor a fatigued and aged bull trend attempting to go higher plagued by gross overvaluation, in an environment of euphoric bullish sentiment, conditions often preceding episodes of market weakness to reinvigorate demand. Investors should take into account that bullish sentiment readings now are greater than those preceding the September 2-3 high, which gave way to a sharp 11% swoon.
Investors should be prepared for the possibility of a more volatile investment environment, and/or for the current negative divergences to possibly give rise to some price weakness, which may turn into a buying opportunity, or should indicators begin to accelerate lower a correction possibly during the first half of 2021. The weight of the evidence suggests an aged and increasingly fatigued bull trend may be in need of a rest.
One last observation about the yawning negative divergences in some supply and demand indicators, and most particularly in the SAMMY tactical indicator. As this is being written on Sunday January 3rd there are news reports of a dozen or so Republican Senators, and some one hundred thirty plus Republican House members, which are posturing to vote against the usually routine ratification of the Electoral vote count. While this may likely just be political theater, should the current occupant of 1600 Pennsylvania Avenue follow on with a declaration of martial law, then the current negative divergence in SAMMY, and other indicators, suggests the stock market may likely be vulnerable to a swift and dramatic decline given the unexpected arrival of such an unprecedented and uncertainty laden catalyst. After touching the September 2-3 all-time high the market lost eleven percent in short order, when the negative divergence in SAMMY was not as developed as it currently. And, lest we forget the market lost 38.4% with record setting swiftness, when both TATY and SAMMY were much stronger than they are now, but with negative divergences in place at the February all-time high.
Given the status of a series of both strategic and tactical supply and demand indicators favoring some weakness in the price yet to materialize, an unexpected declaration of martial law would have the potential to set up a decline, which could arrive with the swiftness of the February to March 23 decline, and with an unknown and impossible to predict degree of wealth destruction. In more ordinary times such an observation would appear to be laughable, and the probability of actually happening at or near zero. However, these are not normal times, and unfortunately for prudent risk adverse investors the probability of such an unpreceded and extraordinary event coming to pass must be recognized as greater than zero. And, obviously the stock market does not like unprecedented and extraordinary uncertainty.
The stock market managed to rally to a new all-time high Friday afternoon during typically slow and low volume holiday trading. However, strategic and tactical indicators did not rally with the price, and continue to build negative divergences with the rising price. Not all negative divergences result in eventual price declines, corrections, or outright bear markets, but the odds almost always favor some weakness in the price before the negative divergences bottom and begin to rally. So, the implication is that the growing negative divergences in the indicators will likely at some point result in some weakness in the price, a buying opportunity, or should the indicators begin to accelerate lower a significant correction in the price.
Lowry Research measures of supply and demand continue to show supply stubborn to decline, but overall the big picture remains favorable according to Lowry metrics. After one of the strangest years on record, investors should remain prepared for perhaps higher than normal levels of volatility as 2021 gets underway. While election uncertainties continue to be resolved, a new Administration will likely encounter some needed adjustments to be made during the first quarter or two in power, if history is any guide. So, while election uncertainties are being resolved, the implications of actually artfully governing a deeply divided country will likely generate new uncertainties, and not to mention the potential for global would be bad actors to create mischief. With highly elevated bullish sentiment readings, and historic overvaluation the investment environment appears ripe for continuing volatility. This would appear to favor trading around opportunities more than just buy and hold long term investing, except for core equity portfolio holdings.
TATY — A REPRESENTATIVE OF A FAMILY OF STRATEGIC SUPPLY AND DEMAND INDICATORS
TATY is shown above in yellow with the S&P-500 overlaid in red and blue candle chart format.
TATY finished the week at 134 after failing to hold the red zone surrounding the 140 level. While TATY may make additional attempts to gain, and perhaps exceed the red zone, for the time being the failure to maintain the red zone must be graded as weakness. If a new bull market began at the March 23 low, then TATY should have led the price higher off that low, which it did not. And, a strong and vigorous young bull market would likely have gained the red zone, and then gained strength to move higher, perhaps even showing enough strength to assault the blue zone at the 160 level. While this may still eventually come to pass, the failure to even hold the red zone must be viewed as a warning that the rally off the March 23 low is very likely not a new bull market, but just another leg up in an aged and fatigued old bull trend.
TATY shows the January-February negative divergence, which preceded the record setting plunge into the March 23 bottom with a down sloping magenta line, and the current building negative divergence is also shown as a down sloping magenta line. The longer this current divergence stays in place the greater the implied risks of some price weakness developing. What TATY cannot do is tell us in advance the depth, and the potential extent of any developing price damage the negative divergence may be suggesting. For the time being TATY is simply suggesting the current rally to new all-time highs is being powered by a weaker balance of demand over supply than at the previous high in February, or more recently the early September all-time high, which gave way to an 11% sharp decline.
SAMMY — A REPRESENTATIVE OF A FAMILY OF TACTICAL SUPPLY AND DEMAND INDICATORS
SAMMY is shown above.
The rising price finished the week at a new all-time high, and is shown underlined on the chart with a rising green line. The negative divergence, which preceded the February to March 23 record swift plunge is still shown on the chart with a dashed down sloping magenta line. The larger negative divergence in place since the February high is shown on the chart as the down sloping dashed orange line. This dashed orange line also shows the more recent negative divergence as the price touched new all-time highs this past week. The failure of TATY and SAMMY to lead the price higher off the March 23 low has been, and continues to be abnormal and atypical behavior relative to the history of previous decades. Since there has been no precedent, we have chosen to take this as a warning that not all is well with the rally off the March low, even though the rally has sustained enough strength to paint out a series of new all-time highs in an environment giddy with euphoria, and gross overvaluation.
Investors will also note that SAMMY did break out above its own resistance represented by the horizontal magenta line, but has failed to enjoy any follow on strength, as SAMMY has recently began to fade again. All this added together is weight of the evidence, and a reasonable analyst may conclude that the Fed liquidity driven rally of 2020 could likely need a breather to reinvigorate demand sometime during the first half of 2021, and perhaps sooner rather than later. The favorable seasonal in the stock market begins to wane as Easter approaches, so before long the waning seasonal influence will join the negative divergences as concerns for prudent risk adverse investors.
Please stay safe.